Eliot Murray

Long only, deep value, contrarian
Eliot Murray
Long only, deep value, contrarian
Contributor since: 2012
Thank you for articulating my point.
Yes you are correct. I have accidentally swapped the terms. But they are very different. The overarching point here is that, yes, companies can "remain" in business with oil below $50. But for how long? Maybe short term, but not for the medium to long-term, because you can't pump empty wells.
Not what I meant. No, we won't run out of oil "soon". I know that. I'm talking about the marginal barrel. Existing shale wells are depleted quickly, thereby necessitating further exploration or nothing. New investment is $70 and prices need to be higher. The depletion of existing could take 2 years, but when that happens oil needs to be higher to be economical. Cash costs are way lower than that but it's only short term. New investment will not be made unless oil is higher than $70.
Thanks Dan! Good points and agree on all.
I appreciate your questions. You're right, shale is not the only oil, but shale is the 'incremental' oil. It explains the recent imbalance of supply vs demand. Once those wells are depleted, if prices are too low, there will be no incremental oil. Thus answers your question on old investment. Maybe marginal cost is cheaper than I realize, but shale will deplete soon and new investment will slow. #5- yes, it's in oversupply, but I think Munger's quote is thinking more long-term. I don't think he messes around with short-term forecasts. He is looking out 10 years (my assumption). #6 is a wildcard. Who knows? But I'm making a bet that the vehicle market will double. Demand is growing and OEMs need at least 18 months lead time to make things work. Only a matter of time. #2... fair enough, I need to do more research. But I think those countries are more oil-centric and can't print money or rely on other industries to prop themselves up. US can borrow money. Can SA? Don't know. Need more research on that one...
Appreciate the compliment. But remember I said "IF" consumption doubles. Never was that plugged into a calculation. I'm just keeping that within the realm of possibilities. I do think China will exceed EIA estimates, but will it double? Who knows. China is a wildcard. And you could be right about marginal cost. But the depletion rate of fracking is very quick. When they deplete, the producers will choose new investment, or nothing. New investment cost is probably still $70-$90.
What ^ he said.
Touche
I didn't specify a time frame.
Agreed, equilibrium price changes, but not down by half! Price is not only a function of supply and demand, but also market emotions. Demand curve has moved inward, but will not stay there. My assumption, for better or for worse, but I think I'm safe long-term.
Thanks for the compliment, Sebastian. I don't really do timing, though. To peg timing, you have to peg the short-term supply and demand in financial markets, and that's pretty much impossible. My guess is as good as yours on "when". Oil could very much tank for the next 6 months, but that's short term, and it has more to do with fear than with fundamentals. As long as you can hold for medium-to-long term, oil will come up.
Ken, I agree with your general sentiment, as I myself am a patient value investor willing to wait on price following value. In fact I just placed an order this morning. I'm merely trying to flesh out the specific short thesis, because as I see it, the majority of the short thesis was based on the Class Action and the SEC investigation. If both are indeed behind us now, it would seem the short sellers are really 'up a creek' now and the only thing keeping the share price under $20 is time. And if it doesn't jump immediately, I'm fine with it, I'm merely perplexed that there is still even a short thesis out there...
CT Programmer, good point about the 15% in 15 days. That's a lot of movement in a short amount of time. I had not actually done the math on that, but it would seem that the short case is losing quickly...
Ken, thanks for the article. I have been keeping an eye on EBIX and the developments of their legal proceedings. It now seems that the Class Action is behind us, and there have been no new updates on the SEC investigation either. The stock in my opinion is worth at least $25-$30. Why didn't the stock move quickly back to around $20 after the news about the Class Action dismissal came out this month? IMO there is nothing holding it back now... is it the shorts?
Paul Wagner, because they've compounded their BV by 16%/yr for the last 2 decades, that's why.
You're welcome! If your thesis on the Fed is true, then any tapering would serve as a catalyst for MKL.
Thanks for the compliment. Not sure if the decision to split or not could be labeled "wise" or "foolish". It's simply a decision mgmt made. They probably have arrived at the same conclusion that BRK.A, AAPL, and GOOG have; and that is that splitting stock only serves to create more volume and volatility and creates value for only those that make money on trading commission.
Thank you for the compliment. Yes, I'm actually curious about your question on unpaid losses as well. The one thing I can think of is that unpaid losses are heavily subjective and based on many managerial assumptions. Markel is traditionally (and refreshingly) very conservative in their reserves, so maybe Gayner's point is to not count this into the equation. Further, I think the reason for this may be that these unpaid losses on the balance sheet have already been debited on the income statement and therefore have already been reflected in the financial results in prior periods, so that the actual cash "payment" is just a follow-through on what has already been recorded. So it would be double-counting, in a sense (not sure, but I'm speculating on Tom Gayner's reasoning).
One thing to note that I didn't include in the article is leverage. With Alterra's investments now included with MKL's, Gayner will have significant leverage with which to grow book value. Investments stand at $14.5B (Gross) currently, and SH Equity of $6.3B. If Gayner can compound those investments at 10% per year, that would mean a 23% growth in book. This is fundamental to the thesis above and should have been included.
Christopher, thanks for your comments.
I mention in the article that the best case is probably not realistic. Is it possible? Of course. Probable, no. The base case FCF CAGR is actually better for the last ten years than it is since 2009, so I consider the use of the smaller growth figure to be conservative. In the end, do we know what the growth will be? No, but the mechanics of a DCF model require that input.
It seems that for every article I write, I get the same arguments about 1) discount rate and 2) organic growth. And I continue to disagree. No one has been able to convince me why only organic growth rates should be used, as if growth via acquisitions were some sort of "second class" cash flow. Where would Warren Buffett be today without the growth through acquisitions? If I were to value Berkshire in the 1970s, 80s,90s, would i only value the textile business? Of course not! wouldn't I value the company based on quantitative factors in addition to the fact that it had the BEST capital allocator in the world at the helm? Ellison has proven to be a good capital allocator through the years and I'm simply basing my valuation on those facts.
Discount rate: I admit looking at a discount rate of 10% in a vacuum looks low, but I use the same discount rate across all my valuations, thereby regulating the discount rate to what it truly is: a measuring stick. At the very most, a hurdle rate. Using different discount rates across different asset classes only serves to muddy the waters of valuation. Why should one stream of cash flows be discounted at a different rate than the next? It is not a risk offset. That's what MOS is for.
As stated in the article, margins will expand as revenue from renewals becomes a larger percentage of the total.
I'm switching valuation methodologies simply because of time and real estate. I could've easily written another 1,000 words and clearly spelled out each methodology and scenario, but I think the readers and the editors both are educated enough to get the gist, and I hope they appreciate the conciseness.
I don't agree with your law of large numbers thesis. See Berkshire, Microsoft, Apple, etc. All 3 have growth ahead and are much larger than ORCL.
Ouissam, I know what corporate overhead is, but I didn't understand your specific questions. The overhead is included in the "Amplify and other" reporting segment.
Agreed.
News Corp is a multinational conglomerate. My analysis was referencing the shares as they are traded on the NASDAQ, but yes, it looks like News Corp is traded on the ASX exchange as well. Hope this helps.
Ouissam, FOX will indemnify NWSA for NOTW: http://on.mktw.net/1cH...
I'm not sure what you mean by "corporate overhead".
Excellent first article, Dennis. Thanks for posting.
I'm not talking about the market. I'm talking about the stock. Aflac is a better company than it was in 2008, therefore it deserves a higher multiple. That's all I'm saying.
Thank you Ray, for the compliments. And thanks for the added data that illustrates Aflac's great business model.
Famous last words before the entire index crashes. Just because something else is trading at a high multiple doesn't mean FB is worth it on an absolute basis. You've heard the saying, "Would you jump off a bridge if everybody does too?" Not to mention their growth is plateauing. Where else to go from here?
I don't follow the reasoning. if FCF is a mirage and all their acquisitions for the last decade were junk, why did DELL have record FCF last year? Last year's FCF is a product of invested capital from years prior. DELL has done something right.
Thank you.
I could estimate organic rates, but that would preclude acquisitions. I dont see any indication they will stop acquiring, what with the net cash position, strong cash flows, and goals of becoming a premier enterprise solution.
Adding the cash doesn't necessarily mean I'm assuming they don't acquire. You're forgetting about the annual $3-$5 billion in FCF that can also be invested/used for acquisitions.
I suppose some may say not to assume acquisitions to be conservative, but I try to forecast accurately and then use conservatism on the purchase decision and margin of safety side of things. In this case, a possible 130% upside is a huge MOS.
HJ, thanks for the compliments. Very good points about the lack of insider buying and the leverage. As far as insider buying, yes, I would definitely like to see less dumping and more buying, however, the most important insider of all (Dell) bought last year and prior to that at a higher cost basis than today's prices and owns nearly a fifth of the company. As far as the leverage, I agree to an extent. I normally dislike debt, but in Dell's case, I like what they're doing. They've increased their debt burden recently to take advantage of cheap money and then use their cash for smart acquisitions. I think their strong cash flows more than counteract those effects. The interest coverage is still 23.19.
Priceless :)